Mining is a difficult business even in a rising metal price environment. As investors it makes sense to find companies that can generate leverage from the rise in precious metals while mitigating at least some of the risks associated with mining. Ben Kramer-Miller, chief analyst of miningWEALTH, says one of the best ways to do this is to invest in royalty and streaming companies.
Royalty and streaming companies provide capital to mining companies in exchange for the right to receive revenues correlated to the mine’s metal output (royalties) or to buy a portion of the mine’s metal output at an agreed upon price (streaming). Mining companies agree to these terms because they need capital for various reasons. Sometimes a mining company will sell a stream or royalty as a part of a financing package. Other times mining companies need capital and sell royalties/streams on operating mines.
Several companies operate almost exclusively through this business model, and it has been incredibly lucrative over the long term. The three big players—Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE)—have all generated above-average returns in the long run, having outperformed mining stocks, broader stock market indexes and the underlying precious metals. There are a couple of reasons for this. First, royalty and streaming companies make money in virtually any metal price environment, including during downturns. Meanwhile, all but the most efficient mining companies take large write-downs, are forced to sell non-core assets, and issue shares at inopportune times in order to stay afloat. Royalty companies were very aggressive in making acquisitions last year, including providing much-needed capital to companies such as Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE). This speaks to their strength, and the deals made …read more